1. Field of Invention
The present invention relates to life insurance products. In particular, it relates to a method for rewarding life insurance policy holders who satisfy requirements relating to insured individuals' wellness, a computer-implemented method thereof, and a computer readable storage medium for storing a set of instructions that when implemented perform such method.
2. Background and Related Art
The field of insurance broadly includes various types of insurance that can be purchased by an individual, and ranges from life insurance to health insurance to auto insurance as well as other types of property and liability coverage. The regulations and practices associated with each type of coverage vary as well, and in some cases these regulations can vary at the state level.
For example, the auto industry is substantially different from life and health insurance underwriting and pricing. Underwriting for risk and establishing a price for the coverage is established prior to issuing the policy; they also may underwrite while coverage is in force. In particular, an insurance company often monitors the insured individual's driving behavior and other factors to establish the premium. Re-pricing for the risk is done at the most granular level—the specific individual being insured. The auto insurance company has the legal right to either raise the individual's premium or cancel the coverage unilaterally. The insured always has the option to cancel the coverage and seek coverage with another insurance carrier.
Health insurance purchased by individuals has similarities to auto insurance but there are substantial differences. Underwriting for risk and establishing the premium for the coverage is also established prior to issuing the coverage. The individual is placed into a “risk class.” However, once the policy is issued ongoing underwriting for risk at the insured level is prohibited and the insurance company cannot terminate coverage for any specific individual. The insurance company can only adjust premium requirements uniformly for all insured individuals in the same risk class. The insurance company can legally terminate coverage but only if they terminate coverage for all individuals in the entire class of policyholders. The insured has the option to cancel the coverage and seek new coverage, and they often do if the new coverage can be obtained under more favorable economic terms.
Individuals can also obtain health insurance coverage as a member of a group, and the coverage is typically referred to as “group health insurance.” Typically the group is the employee population of an employer. In the group coverage case, there is no underwriting for risk at the individual level. The risk assessment is done at the group level considering the nature and health risk characteristics of the group. Similar to individual health insurance, the insurance company cannot cancel coverage for any specific individual level. The insurance company does have the right to cancel coverage for the entire class; in this case the class would be all the insured individuals in the group plan. Premiums are adjusted at the group level based on emerging experience.
Individuals have the ability to opt out of the group and seek individual coverage outside the group plan. Similarly, the group's decision maker has the ability to cancel the entire group's coverage if new coverage can be obtained elsewhere under more favorable terms.
Life insurance coverage can be obtained either as an individual (“individual life insurance”) or as a member of a group (“group life insurance”). Similar to health insurance, the group is typically employees of an organization. Group life insurance is typically obtained on a guaranteed issue basis (i.e. no individual underwriting) with pre-determined coverage amounts (e.g. fixed amount per person or a multiple of the individual's salary) and minimal specified requirements (e.g. must have been actively at work for a specified period of time). There is no underwriting for mortality risk at the individual level; the insurance company underwrites for risk based on nature of the employer's business, demographics of the employees, etc.
Similar to group health insurance, the insurance company providing group life insurance cannot cancel the insurance coverage for any specific individual, but has the right to cancel the coverage for the entire group. However, there is a major difference from health insurance plans: the individual has the right to convert their group life coverage to an individual life policy of equal or smaller coverage without providing any evidence of insurability. In effect, healthy individuals can opt out of the group and seek individual coverage under more favorable terms. This dynamic will drive up the average expected mortality ratio for the entire group. If the group coverage gets terminated, the highest risk individuals have the strongest incentive to exercise the conversion option.
Individual life insurance coverage consists of policies covering a specified individual. Unlike group life insurance, that specific individual is underwritten for risk and the policy premiums and/or cost of insurance charges reflect the individual's risk classification. However, once the policy is issued the insurance company has no ability to require new underwriting information and thus unilaterally change the risk classification. Even if the individual applies for additional coverage (a product flexibility feature commonly available with universal life plans) and the risk classification would change to the insured's detriment, the insurance company cannot change the risk classification on the original insurance coverage. As long as the individual meets the premium requirements, the coverage cannot be canceled by the insurance company. In effect, the insured maintains all the options: if they apply for new coverage and the risk classification has improved and/or the economic terms of the new coverage are more favorable, they can exchange the old policy for the new one. If it is not more favorable, they simply decline to accept the exchange.
Thus, there is a consistent theme among the economic incentive structure for life and health insurance plans. The individuals with the best risk profile (“best risks”) have the economic incentive to seek newer coverage with more favorable terms, while the individuals with the worst risk profile have the economic incentive to remain in the current plan coverage. Within the contractual limits, the insurance company may adjust their prices uniformly for all individuals in the same risk class to reflect the emerging health and/or mortality experience in order to preserve the proper balance of revenues and policyholder benefits. The more the best risks opt out of the original plan, the more likely the experience on the policies remaining will have a higher claims ratio overall. This is often referred to as “the death spiral” since insurance company efforts to raise premiums to cover the higher claims ratio may encourage the remaining best risks to opt out, driving up the claims ratio, which further encourages the remaining best risks to opt out, and so on.
There is one substantial difference in monitoring the emerging risk between the health insurance and life insurance plans. With health insurance, claims from individuals are “repeatable” since poor health can result in ongoing claims for the same illness and/or new claims for different illnesses can emerge from the same individual with a poor health profile. The insurance company cannot obtain new underwriting information on individuals but claims experience has high predictive value on future claims since the individuals generating those claims may likely remain in the group.
With life insurance, claims are obviously not “repeatable” for the individual. Once a death claim occurs, there is no ability to collect another premium from that individual and there will never be another claim. In effect, the insurance company cannot require new information on individuals to gather insight on the current state of the risk. In addition, claims experience for a group of policies has lower predictive value on future life expectancy (relative to health insurance) since everyone still in the group has never submitted a death claim. To the extent poor underwriting practices allowed some unhealthy risks into the group that resulted in higher than expected death claims, this could explain poor mortality ratios to date. However, this does not validate the remaining lives have a poor life expectancy profile because the ineffective underwriting practice could have been isolated to those individuals dying prematurely. Any effort to raise premiums and/or insurance charges, particularly without any knowledge of the health state for the remaining policyholders in the class, raises the likelihood of “the death spiral.”
The life insurance industry's product types can be segmented into “participating” and “non-participating”. Participating and non-participating policies have many similarities but are different in two key aspects. The first difference comes from the ownership structure of the company. Participating policies are generally sold by mutual insurance companies whereby the policyholders are technically the owners of the insurance company. There are no shareholders so the members (e.g. policyholders) do not have a means to sell that ownership or convert it to any other financial asset. Their membership or ownership status in the company's capital and surplus is effectively realized when the company “demutualizes” or converts to a stock company structure.
The second difference comes from how the policy and its inherent insurance charges are designed and managed relative to expected and emerging experience. Since the premiums and cash values of participating policies are based on guaranteed/conservative assumptions, dividends effectively represent a refund of past charges that were in excess of the guarantees. For example, whole life policies establish guaranteed premiums and guaranteed cash values based on very conservative assumptions related to mortality, interest income, and expenses. To the extent the aggregate experience of the class is more favorable than the assumptions supporting the underlying guarantee, policyholders are eligible for a dividend declared at management's discretion. Participating means the policyholders “participate” in the emerging experience of the class of business subject to the contractual guarantees and the insurance company's discretion to distribute the economic benefits of favorable experience.
It should be noted that mutual companies selling participating policies are not required by law to adjust dividend scales as experience emerges (positive or negative). In the general course of managing the business, mutual insurance companies may choose to retain favorable experience and boost corporate equity funds or redeploy those excess earnings into other lines of business. Conversely, competitive pressures may cause insurance companies to use corporate equity funds or profits from other lines of business to subsidize unfavorable experience with artificially high dividend scales.
Participating whole life policies are bought by individuals with the expectation of a dividend since consumers expect the experience to be more favorable than the conservative guarantee inherent in the premiums. Therefore the policy is sold with a projection of dividends that reflects the actual anticipated experience relative to the embedded guarantees. As the individual ages and more time passes since the underwriting was performed, the expected mortality rate increases. For two insured individuals with the same age and underwriting classification, the expected mortality rate can be substantially different if one individual's underwriting information is more dated (especially if the difference is more than 15 years, for example). The more favorable dividends are, the more consumers will be encouraged to remain in the class in general. Note, however, the long-standing traditional industry practice is to distribute the favorable claims experience to all individuals in proportion to their expected mortality cost. To the extent a specific individual's health has been maintained or improved since he/she purchased the policy (in other words, their true expected mortality based on the most current information is lower than the “expected” mortality inherent in the insurance company's pricing), the insured may find it economically advantageous to seek a new policy despite the dividend (even if the dividend is more favorable than expected). Conversely, unfavorable mortality experience and thus poor dividend payouts will increase the incentive for the individual to shop for new insurance coverage, initiating the process for the “death spiral” to begin.
Stock insurance companies are owned by shareholders and typically sell “non-participating” insurance plans. Stock companies typically offer permanent life insurance plans using the universal life chassis (“UL”) where the policy has a “current cost of insurance” or “COI” and a guaranteed COI. The current COI is based on a best estimate of the mortality cost for that individual's risk class established at the time the policy was originally underwritten and issued. This expected mortality cost would be identical to that established in a participating whole life dividend scale, all else being equal. The process and underlying economics are the same. The key difference between a participating policy and a non-participating policy is the approach to establishing the charges to the consumer. The participating policy establishes a premium/charge based on the guarantee and refunds favorable experience after-the-fact via the dividend mechanism. The non-participating contracts establish the current period COI charge based on expected experience. As experience emerges, the insurance company has the legal right to raise or lower the current COI charge prospectively but they cannot retroactively change the COI charge. Furthermore, the prospective COI charge cannot exceed the contractually-guaranteed COI charge.
Managers of participating plans and non-participating UL plans face similar dilemmas when the business is showing improving or deteriorating mortality. Participating plan managers must make a macro business decision whether to pass on the claims variance (an economic variance which is applied proportionally to all policies in the class) retroactively through the declared dividend. Non-participating plan managers cannot recoup past losses but they must determine if the past experience is indicative of the prospective experience and then make a macro business decision whether to adjust the UL COI charges. In both instances, this decision is made without any new knowledge of the life expectancy profile of those insured still in the group. Similarly, each individual remaining in the plan will evaluate their current health, the net current price of the insurance coverage, and the cost of exchanging for a new policy to determine the plan most favorable to their situation.
Term life insurance provides coverage for a limited period of time in return for a specified level of premium. One insurance company developed a term insurance product with a standard premium scale but provided the individual with an opportunity to get a discount on that premium if they completed a running event (e.g. marathon, 10K run) within an age-group specific time limit for the designated distance. Designers of this policy believed that runners with the proven ability to complete the distance within the prescribed time period for their age bracket would have better mortality experience than other individuals in their respective risk class. In this term insurance plan, the premium discount was set at policy issue. The premium discount was guaranteed at issue and thus did not have any link to the emerging mortality of the block. Consequently, the company did not retain any ability to adjust the size of the reward/discount. As a result, the same economic incentive structure is resident with this runners term insurance product as with all individual life insurance products: the healthier the individual overall, the stronger the economic incentive to opt out of the current insurance contract in exchange for new insurance coverage with more favorable economic terms.
In view of the foregoing, it would be advantageous to provide an improved form of life insurance that helps avoid the “death spiral” by rewarding and encouraging healthier individual policy holders to stay with the plan, and maintaining the ability to adjust the size the reward in conjunction with the emerging characteristics of the group.